December 09, 2014

Structured Settlements 2014 - Primary Market

The United States structured settlement primary market has continued to slowly recover from its 2012 nadir during 2014 with first nine months annuity sales of approximately $3.9 billion resulting from 19,778 cases (as reported by Melissa Evola) a premium increase of 3% compared to $3.73 billion for the same period in 2013.

Total projected 2014 annual premium of $5.28 billion, however, is expected to fall substantially short of the historic 12 month industry apogee ($6.2 billion in 2008) after consistently averaging close to $6 billion annually from 2001-2007. For estimated annual structured settlement annuity sales since 1976, see the structured settlement wiki.

Adding these 2014 third quarter results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru September 30, 2014:

Many structured settlement industry participants attribute decreased sales to low interest rates. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981. Here are several historic average annual rates for 30 year Treasury securities (source: U.S. Department of the Treasury):

2014 (as of December 5) - 2.97%

2013 - 3.96%

2012 - 2.95%

2011 - 3.91%

2010 - 4.25%

2009 - 4.08%

2008 - 4.28%

2007 - 4.84%

2000 - 5.94%

1990 - 8.61%

1980 - 11.27%

Submarkets - Two noteworthy submarkets are incorporated within the structured settlement annuity production numbers set forth above:

Non-Qualified Assignments

Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC section 130.

Unlike qualified assignees, U.S.-based, non-qualified assignees are subject to income tax on the amount they receive from whatever entity assigns (or more accurately "delegates") periodic payment obligations for claimants who do not qualify for tax exclusions under IRC section 104(a)(1) or (2) - such as employment discrimination cases or deferred attorney fees.

Despite the promise of a large potential "non-qualified assignment" market, reported sales on non-qualified structured settlement annuities by NSSTA members have declined since 2012.

A Medicare set-aside (MSA) is an administrative and funding mechanism utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute.

Although Federal law does not define MSAs, or mandate specific types of MSA funding mechanisms, CMS (the responsible federal agency) has established certain basic requirements for workers compensation MSAs (WCMSAs).

No similar rules exist for liability MSAs. In October 2014, CMS withdrew a Notice of Proposed Rulemaking (NPRM) which was expected to address liability MSAs.

Under current CMS rules, structured settlement annuities have an inherent cost advantage over lump sum alternatives for funding WCMSAs resulting from the method CMS prescribes for calculating present values.

Based upon industry sources, S2KM has previously estimated that eight (8%) percent of 2013 structured settlement premium and 24 percent of 2013 structured settlement annuities were attributable to WCMSAs. Under current CMS rules, these numbers could increase in 2014.

Hardship Conversion Feature - PLR-143928-13 also approves favorable tax treatment for a structured settlement annuity with a commutation pursuant to a Notice of Hardship Conversion which the PLR describes as follows: "The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under § 5891(b)(2). The qualifying hardship circumstances are financial hardship due to medical expenses, expenses related to a terminal illness, home improvement expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment."

Periodic Payment Reinsurance - Although first offered in 1982, Berkshire Hathaway re-introduced its periodic payment reinsurance product during 2014. Issued by National Indemnity Company, a Berkshire property and casualty company, this product is available for both tax-free periodic payments [under IRC 104(a)(1) and/or (2)] and non-IRC 130 tax-deferred periodic payments. In many respects analogous to traditional structured settlements, Berkshire asserts multiple advantages for its reinsurance product. These include greater financial strength than other structured settlement product providers plus higher interest rates because, unlike life insurers, National Indemnity's investments are not concentrated in bonds. Unlike traditional structured settlements, however, periodic payment reinsurance does not qualify for guarantee fund coverage and cannot be used by self-insureds. For more detailed analysis of periodic payment reinsurance as well as other structured settlement financing alternatives, see Chapter 3 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).